Are Homeowners in Default to Blame for Foreclosure Crisis?

Boot Camper April Charney in the news, interviewed by ANNIE LOWREY of the Washington Independent.

… servicers have in many cases resisted helping homeowners in foreclosure with principal write-downs, modifications or other solutions. The system did not work to keep families in homes. It worked to process foreclosures as fast as possible.

To get a sense of how that happened, I spoke with April Charney, a lawyer at Jacksonville Area Legal Aid, a non-profit clinic that helps low-income Floridians. The interview is lightly edited for clarity.

TWI: Some, including J.P. Morgan Chase chief executive Jamie Dimon, are arguing that this is a paperwork problem, and the homeowners undergoing foreclosure were in default.

April Charney: There is a contract that Fannie and Freddie applies to all its home loans, a customer service, of sorts, that you pay for in your mortgage. It is hundreds of pages online and it’s called the “single-family loan servicing guideline.” There’s a section just for default loan servicing — for servicing loans when the homeowner is in default — and it lays out requirements of the servicers. Any servicer of a Fannie- or Freddie-backed loan, when a borrower goes into default, the servicer has to give the borrower this very special customer service to try to avoid the foreclosure.

It never happens. The servicers just push the loans into foreclosure. They’re missing that entire legal step. We have a complete and utter failure of default loan servicing — a contractually required step in the process that’s there to help homeowners in default. It is preexisting, far preexisting this crisis. And it’s in every contract, and every servicing agreement. The servicer is supposed to be bound to those best practices.

So I’m sick of hearing — they’re in default! They’re not paying their mortgage! They’re delinquent! The servicers have whole books of rules about what they’re supposed to do to aid the homeowner in that case. And they haven’t done any of it.

TWI: Are these guidelines, or are they actually obligated to do it?

AC: No, it’s a breach of contract. And it’s also in the pooling and servicing agreements [for mortgages that have been sold to investors, rather than being held by the mortgage-originating bank]. That’s a breach of contract, as far as the servicers and the investors are concerned. …